[CF] 3 budgeting mistakes and what they lead to

 Typos in numbers and formulas

Some errors in the budget calculation do not even have time to manifest themselves. Others are not found at all, but because of them the company may abandon a profitable project or unfairly accuse an employee of overspending.

For most calculation errors, there is a tolerant reason – the human factor. It is annoying that there is often no specifics behind it. Let’s try to fix it.Let’s talk about three “human” calculation errors, what they lead to and whether something can be done about it.

There are several options for such errors:

• added thousands with millions, kilograms with money, etc. (amounts of different orders or different units of measurement)
• accidentally confused: 393, not 193 (digits when typing numbers), not 393, but 3.93 (digits for sums) or “double minus” (signs in formulas)
• missed or counted twice in the total some budget line, incorrectly entered initial data line by line (for example, sales volume and average check)

Looks harmless, but such mistakes can be the most significant. Especially if further this amount is involved in the calculation of several items. Let’s consider an example (see table 1).

When budgeting the project, the lines “number of orders” and “average bill” were confused. Now, in both versions of the plan, the amount of revenue does not differ – $ 550 thousand. And the error in the planned profit – $ 126.1 thousand. It is more, because less resources were required to obtain it.

Suppose that the need for sales managers is determined based on the constant workload of 100 orders per manager. With a plan of 550 orders, you will need not 10, but 6 sales. Labor costs are obtained below. The budget for an advertising campaign at the rate of $ 20 per order is now also less.

It seems that this is even better, but no. The planned sales volume of 550 orders may come into work for other departments. Most likely, an error in the planned average bill (which is now almost 2 times larger) will be noticed quickly or as soon as it is discovered that there were no orders in the first month. In fact, the planned sales volume of 550 orders will be accepted at the correct price of $ 550. As a result, $ 121.4 thousand of profit will be lost and the market potential for 450 orders will be missed. And next year the niche may be occupied by a competitor.

In addition, if the team already employs 10 sales managers, you need to plan staff reductions, otherwise the project will be unprofitable.

The sooner this data entry error is noticed, the better.

What to do?

1. Indicate the source data for the budget separately – it is better to indicate it on a special sheet. Do not sew them up inside formulas with numbers, but use cell references. It’s easier to check this way.

2. Compare the analytical indicators of the budget with the last year, with the general dynamics. In our example, the average check or a decrease in sales volume (if any) should be alarming.

3. Introduce a rule be sure to check yourself before sending the calculation to the next contractor.

4. Test new forms of calculation using prime numbers or data from previous years.

5. Recheck yourself through formulas with different calculation methods (for example, self-calculation by year or summing monthly values).

# 2. Ignorance of the rules and formulas for calculating the indicator

This error can be caused by:

• not knowing the basic formulas for calculating a specific budget line
• not understanding the limitations of a particular method (economic or arithmetic rounding of values, forecasting methods)
• unclear content of the subject of settlements (payment, accrual, with VAT, without VAT)

Often no calculations are made for the budget, but simply last year’s data. But for each article there is a specific formula, its own calculation rules, a sequence of actions during formation, an understanding of how the business process proceeds. Let’s consider an example of calculating a budget, when we did without it, deciding to calculate quickly and in our own way (see table 2).

The situation was specially modeled so that the calculation error is $ 3 thousand (1.34%). It is usually called minor, but in fact it is not so harmless.

Where did you go wrong? It is not uncommon when the budget calculation starts with the first figure that comes across and confuses BDR with BDDS. However, they are different in economic sense. The BDR reflects costs excluding VAT. In BDDS – payment of obligations with VAT (most often) in accordance with the terms of contracts. An average check of $ 660 is actually $ 550, but with VAT.

Let’s say the performer had different reports and a signed contract for an advertising campaign in the amount of $ 24 thousand (including VAT), with an advance payment of 50%. The cost of advertising 1 order of $ 20 (from the estimate for the contract) was taken as the basis for determining the sales volume of 600 orders ($ 12 thousand / $ 20). This is a key error and out of sequence. But in the final budget, all this is not obvious.

In addition, under the article “creating and maintaining a site”, the amount intended for the BDDS is indicated – there is no need for payment.

The number of sales managers was taken from the report, and not from the staffing table, and was not compared with the workload. This is how 5 people appeared in the plan.

How can the situation develop in fact? Similar to the first example. The sales plan of 600 orders can be taken into account. They will see an error in the calculation of the number of managers, correct the amount of payment for costs for the BDR. The average check will also be added to the plan without VAT – $ 550. The amount of lost profit due to a calculation error will remain $ 91 thousand. The sooner the inability to calculate according to the rules is revealed, the better for the fate of the project.

What to do?

1. The most effective way is to analyze the fact in detail for any deviations from the plan. If necessary, talk to specialized specialists.

2. Make a detailed calculation for all items and assess whether it can be replaced by assumptions or calculations based on the average, deflator, etc. (that is, for simplicity, consider differently, but without loss of quality) .

3. Try to apply flexible planning technology to your budget items (put at least some of the formulas for items that directly depend on the volume of sales and production, and then analyze the deviations in detail).

# 3. Made a budget for ourselves, not for the company (calculation with a margin)

These are not errors in the calculations themselves, but in relation to the deviation of the plan from the fact. Unlike the first two situations, here all calculations are often verified: there are no typos and correct formulas. But the original data is deliberately distorted – to guarantee the result.

The classic variant of the “always positive total”:

• “overfulfillment” of the revenue plan due to the underestimation of the planned initial data
• “saving” costs by overstating the planned initial data

This does not appear out of nowhere. Perhaps, in the company, the budget has become a tool only for punishment or reward, and not for effective management. Lean planning gives employees a sense of safety and comfort. But the cost of this approach may be too high for the business. For example, a company will refuse interesting projects and solutions because they do not have enough funds to finance or they were planned unprofitable.

The option when the business is persistently trying to “get fact into the plan”, especially in the presence of calculation errors, is also not very good. For example, the plan made a mistake in the number of staff or the budget for wages, but did not correct it. The plan was fulfilled, however, under tense conditions. This can provoke layoffs or a decrease in motivation. Or, under the overstated plan, they could apply for an unnecessary loan or buy an excessive amount of goods.All business content in a convenient format. Interviews, cases, life hacks bldg. the world – in our telegram channel. Join!

What to do?

1. Practice a qualitative analysis of budget deviations (highlight factors and reasons: for example, an increase in prices due to an increase in the exchange rate, a decrease in payroll costs due to the absence of an employee, etc.).

2. Reward for proven results and correct actions for the effectiveness of the company.

3. Changing attitudes towards budget adjustments is a necessary workflow.

What do the three calculation errors have in common

• there is no algorithm and a person who will immediately find all inaccuracies before the budget is approved (you need to strive to reduce their number)
• often errors are discovered ex post facto and accidentally when a problem arises (especially if there is a lot of money in the company)
• it is important to find, correct mistakes in time and minimize the consequences (especially, you should not allow calculation errors to give rise to correction errors).